Lecture 6 M&A.pdf - MGMT 430 Week 6 Mergers and...

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MGMT 430, Week 6: Mergers and Acquisitions William Mann UCLA Anderson UCLA Anderson MGMT 430 – Week 6 1 / 28
VI. Mergers and Acquisitions UCLA Anderson MGMT 430 – Week 6 2 / 28
M&A markets UCLA Anderson MGMT 430 – Week 6 3 / 28
M&A waves in the US Some characteristics of past US merger waves: 1960s: “The conglomeration wave” – Acquisitions in unrelated industries, believing that diversified firms were better. 1980s: “The deal decade” – Breaking up the conglomerates and undoing earlier mergers. Many hostile bids. 1990s: “Strategic” or “global” deals – Aimed at expanding firms into new markets and related industries. 2000s: “The sixth wave,” “the golden age of private equity” – Public companies taken private; consolidation in many industries. UCLA Anderson MGMT 430 – Week 6 4 / 28
Consideration: How to pay for an acquisition? Cash, from retained funds or from borrowing. Immediately taxable when received. Useful if acquirer is more confident. Stock in the merged company. Taxable only when sold, allowing some tax timing. Implies an “exchange ratio” of valuation. UCLA Anderson MGMT 430 – Week 6 5 / 28
Structure: How to set it up? Acquisition of stock: Sellers are the target’s shareholders. They owe capital gains tax, but target company is not taxed. They must either approve by a vote, or 90% must sell. Tax basis of any acquired assets carries over at old value. Acquisition of assets: Seller is the target company. Identify and transfer title to each individual asset sold. Still requires approval if not in the “ordinary course of business.” Tax benefit 1: Tax basis of assets stepped up to new value, allowing for greater future depreciation charges. Tax benefit 2: Goodwill amortizable over 15 years. Tax cost: Target and its shareholders both taxed. The differences are mostly from a tax and legal perspective. UCLA Anderson MGMT 430 – Week 6 6 / 28
Process: How to make it happen? One-step merger, aka long-form or statutory merger. Put the merger to a shareholder vote (50% threshold). Slow, and requires approval by the target’s board. Two-step merger: (1) Tender offer, (2) short-form merger. Tender offer: Commitment to buy set # of shares at set price. Short-form merger: After the parent owns 50% of the target, can combine them without holding a shareholder vote. (Delaware lowered this threshold from 90% in 2013.) For this reason, 2-step merger is usually faster than 1-step. More difficult to finance, due to uncertainty about step 1. Does not require approval by target’s board. UCLA Anderson MGMT 430 – Week 6 7 / 28
Hostile takeovers: Legal grounding On what legal basis could the target’s board oppose an offer?

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